Costs - all 7 explained - TFC, TVC, TC, AFC, AVC, AC and MC

Summary

The video explains seven cost measures using a car factory that produces between zero and four cars. Costs are given in pounds.

Worked example

Cars produced TFC TVC TC AFC AVC AC MC 0 £40 £0 £40 — — — — 1 £40 £6 £46 £40 £6 £46 £6 2 £40 £11 £51 £20 £5.50 £25.50 £5 3 £40 £15 £55 £13.33… £5 £18.33… £4 4 £40 £20 £60 £10 £5 £15 £5

The seven costs

• Total fixed cost (TFC): Costs that do not change with output, such as rent or insurance. In the example, TFC stays at £40, even when no cars are produced.
• Total variable cost (TVC): Costs that change as output changes, such as tires and engine parts. The example’s TVC rises from £0 to £20 as production increases from zero to four cars.

• Total cost (TC): The sum of fixed and variable costs. Formula: TC = TFC + TVC

• Average fixed cost (AFC): Fixed cost per unit of output. Formula: AFC = TFC ÷ output

• Average variable cost (AVC): Variable cost per unit of output. Formula: AVC = TVC ÷ output

• Average cost (AC): Total cost per unit of output. Formula: AC = TC ÷ output

• Marginal cost (MC): The additional total cost of producing more output. In the example, producing the first car adds £6 to total cost; the next cars add £5, £4, and £5, respectively. Formula: MC = change in total cost ÷ change in output

Average costs cannot be calculated at zero output because they require dividing by the number of units produced. Marginal cost compares costs across output levels; the change in output does not always have to be exactly one unit.

Speakers or sources featured

One unnamed presenter or narrator explains the concepts. No other speakers or sources are featured.